Welcome News for Money Market Accounts: Inflation Chills Out

07/05/2011 04:55 pm ET | Updated Sep 04, 2011

It may be heating up outside, but a cool breeze of relief has come from an unexpected source. The latest Consumer Price Index (CPI) report shows inflation easing back a little bit.

According to recently-released figures from the Bureau of Labor Statistics, inflation rose by just 0.2 percent in May. That's still enough inflation to be troubling to people with money market accounts, but it is a considerable improvement from the higher inflation trend of recent months.

Examining the inflation numbers

The CPI rose by 0.2 percent in May, the lowest monthly increase in six months, and just half of April's rate of increase. At 0.2 percent a month, inflation would project to an annual increase of 2.4 percent, which would be considered fairly moderate. By way of contrast, over the previous five months, inflation had been on a tear that would have projected to a 5.4 percent rate of inflation.

The key to the lower inflation number was that oil prices finally halted their rally in May. As a result, the energy component of the CPI declined a little last month. This aspect of inflation has increased by 21.5 percent over the past year, so the easing of energy prices is very welcome news.

Not only is energy an important component of inflation in its own right, but because energy is essential to the provision of most other goods and services, rising energy prices can have ripple effects across all other components of inflation.

While energy was the only component of the CPI for which prices actually fell in May, the inflation rate for items other than food and energy was a reasonable 0.3 percent for the month. While this is a slight rise from the rate of recent months, it does not indicate that energy has sparked an irreversible chain reaction of inflation in other sectors.

If energy costs continue to ease - and so far, June has continued May's moderating trend for oil prices - there is no reason to believe that the general rate of inflation won't subside as well.

Inflation in the context of money market rates

Inflation is always a concern for savers, because it attacks the purchasing power of their savings. This concern has been especially acute over the past year-and-a-half, as inflation has soared past money market rates.

Over the past year, the CPI has risen by 3.6 percent. In contrast, according to the Federal Deposit Insurance Corporation (FDIC), money market rates now average 0.21 percent nationally. What really puts this in perspective is the fact that even with inflation moderating somewhat last month, May's inflation alone was enough to just about wipe out the value of a whole year's worth of money market interest. Of course, you can and should search for money market accounts offering above-average rates, but at the present time you are not going to find money market rates high enough to beat inflation.

In short, inflation is still higher than even the highest money market rates, meaning the best that depositors can do is search for money market accounts that will at least limit the damage done by inflation. However, if the inflation rate continues to ease, this search could get easier in the months ahead.

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"Welcome news for money market accounts: Inflation chills out"